Outlook of fiscal policies and their impact on the euro area bond markets, changes in issuance patterns and strategy of DMOs - European Central Bank
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Citi Markets| Rates and Currencies
Outlook of fiscal policies and their impact on the
euro area bond markets, changes in issuance
patterns and strategy of DMOs
ECB Bond Market Contact Group, 3 March 2021
Zoeb Sachee
Head of Euro Linear Rates Trading
zoeb.sachee@citi.com
+44 20 7986 9340
For institutional use only(1) Fiscal outlook – net issuance set to decline, but only slowly
The fiscal outlook remains highly uncertain. As it stands, EMU-11 gross issuance in 2021 (Citi forecast
€1.255trn) is likely to be very close to 2020 (€1.218trn).
Fiscal deficit likely to decline, but only slowly (Citi forecasts) EU issuance set for rapid growth…
2020 EU Past Funding Rollover funding SURE Recovery Fund MFA
2019 Pre-Covid 2021 2022 2023 2024 2025 160
Final
forecast
Germany 1.2 0.4 -4.8 -6.1 -3.3 -2.1 -1.9 -1.8 120
France -3.0 -2.3 -9.6 -6.7 -4.3 -3.1 -2.4 -2.0
Italy -2.2 -2.3 -10.0 -9.0 -6.3 -4.9 -3.9 -3.6 80
Spain -2.2 -2.4 -10.7 -8.4 -5.4 -4.0 -3.3 -3.1
Greece 1.1 0.7 -8.1 -6.0 -3.7 -2.1 -0.7 0.4 40
Portugal -0.1 0.0 -7.3 -5.3 -3.5 -2.8 -2.2 -1.1
Netherlands 1.3 0.3 -7.1 -5.3 -3.5 -2.4 -1.7 -2.1
0
Belgium -1.2 -1.3 -10.2 -7.2 -5.8 -4.0 -3.1 -3.5
2019
2020
2021
2022
2023
2024
2025
Euro Area -0.8 -1.0 -7.7 -6.6 -4.4 -3.2 -2.6 -2.4
…but it is unlikely to provide a major offset for EGB issuance (table shows Citi forecasts for 2021)
Next Generation EU Net market Estimated share 2021 gross bond
Government deficit SURE Bond
program (Recovery Fund), funding* (Citi supply (Citi
estimates (€bn) support Bonds Bills redemptions
Citi estimates estimate) estimate)
Germany 217 1.6 180 88 92 152 240
France 173 2.4 161 142 20 143 285
Italy 152 10.9 9.0 132 122 10 222 340
Spain 107 11.3 6.8 89 79 10 94 173
Belgium 28 4.2 0.4 23 23 0 15 36
Austria 23 0.2 23 22 1 18 40
Finland 12 0.2 12 11 1 7 16
Ireland 18 0.1 18 20 -2 0 20
Portugal 14 2.9 3.3 4 4 0 11 15
EMU-11 789 30 26 684 551 134 680 1,225
*excludes funding sources like German refugee fund withdrawal/French correspondents’ deposits
Source: Citi Research, Citi Economics, EU, DMOs
2 For institutional use only(2) Bond market impact – issuance vs QE
Heavy DV01 of issuance in early 2021 (given combination of high funding needs, front-loading and
issuing longer) has met with a slower pace of PEPP, perhaps contributing to bear-steepening.
The Net Cash Requirement (gross supply – free float
The supply burden in early 2021 has risen with the coupons – redemptions – net QE) for 2021 looks
front-loading of issuance vs slowing QE. very different depending on PEPP pace (€60bn/mth
would mean second highest NCR since 2015).
EMU-11 bond supply Gross PEPP (EGB only est.) 2021
Gross PSPP (EGB only est.) ECB buying net of EGB issuance Monthly Monthly Monthly
2014 2015 2016 2017 2018 2019 2020
25 PEPP at PEPP at PEPP at
€50bn €60bn €75bn*
5 Germany -1 -120 -193 -136 -82 -10 -56 -2 -15 -34
France 25 -47 -109 -80 8 38 -54 -0 -18 -44
Italy 19 -71 -83 -121 -36 -16 -79 -26 -41 -63
-15 54 -30 -80 -51 1 -6 -23 -13 -23 -40
Spain
Netherlands 13 -19 -42 -39 -30 -13 -4 17 15 12
-35 Belgium 1 -11 -22 -22 -3 1 -6 -4 -6 -9
Austria -9 -13 -13 -15 -12 -11 -1 2 -0 -4
-55 Finland 2 -6 -10 -8 -0 2 -4 4 3 1
Ireland 5 -1 -14 -0 1 -2 -7 12 10 8
-75 Portugal -0 -2 -9 -2 -0 1 -2 -10 -12 -14
EMU-11 114 -321 -575 -474 -152 -10 -241 -22 -91 -195
17Apr
21Aug
18Sep
5Feb
3Apr
7Aug
4Sep
13Nov
27Nov
11Dec
25Dec
16Oct
30Oct
15May
29May
12Jun
26Jun
22Jan
10Jul
24Jul
2Oct
1May
8Jan
Wk-end: *Full utilisation by March-2022
Higher net supply, near historic yield lows, may have
been one catalyst for € curve bear-steepening.
Source: Citi Research, DMOs, ECB
3 For institutional use only(3) Changes in issuance patterns and strategy
(1) 15yr+ EGB supply continues to rise. (2) Greater reliance on bills, but this may reverse.
DV01 of EMU-11 gross supply by sector (€million/bp): a The sharp rise in bill supply – to meet the issuance
rising allocation to the 15yr+ sector as issuers take shock – is likely to reverse in the years ahead (like
advantage of low long-term yields. post GFC)
1400 58% 200
2-5yr 7-10yr 15yr+ %15yr+ (RHS) Bills net supply
1200 56% 150 Germany France Italy Spain
1000 54%
100
593 686
800 52%
50
600 400 390 390 50%
362
0
400 48%
416 387
262 275 253 266 -50
200 46%
120 128 116 115 135 145
0 44% -100
2016 2017 2018 2019 2020 2021F 08 09 10 11 12 13 14 15 16 17 18 19 20 21F
Issuers looking to term out issuance following the
supply shock in 2020
Source: Citi Research, DMOs
4 For institutional use onlyDiscussion Points
1. Performance of new issues – scale and type of demand, market impact (see Appendix 1)
2. Cross country comparison of Euro Area fiscal policy – how does EA compare to other countries? (see
Appendix 2)
3. Should monetary policy continue to support fiscal policy?
5 For institutional use onlyAppendix 1a: New issue concessions in EGB and EUR SSA
New issue concessions have been fairly contained and books well oversubscribed
EGB Syndicated Issuance 2021YTD
Re-offer Change
Pricing Name Green Cur Amt. (mn) Maturity Initial Price Thoughts IPT to RO Now NIC* (bp) Books (mn) Subs.
(RO) vs RO
16-Feb-21 Italy EUR 10,000 Aug-31 BTP (04/31)+8A 4 -4 4 Flat 1 65,500 6.6x
16-Feb-21 Italy (inflation) EUR 4,000 May-51 BTPei (09/41)+27A 22 -5 23 +1 0 16,600 4.2x
09-Feb-21 Spain EUR 5,000 Oct-71 SPGB (07/66)+15A (+/- 2 wpir) 13 -2 10 (3) 2 65,000 13.0x
03-Feb-21 Portugal EUR 3,000 Apr-52 ms+88A 85 -3 92 +7 2 40,000 13.3x
02-Feb-21 Finland EUR 3,000 Apr-52 ms+5A 2 -3 8 +6 1 23,500 7.8x
02-Feb-21 Belgium EUR 5,000 Jun-71 OLO (06/66)+9A 7 -2 6 (1) 2 53,000 10.6x
27-Jan-21 Greece EUR 3,500 Jun-31 ms+110A 100 -10 101 +1 4 29,000 8.3x
27-Jan-21 Austria EUR 4,000 Feb-31 ms-10A -12 -2 -6 +6 1 32,000 8.0x
19-Jan-21 France EUR 7,000 May-72 OAT (05/66)+9A 7 -2 6 (1) 1 75,000 10.7x
13-Jan-21 Spain EUR 10,000 Apr-31 SPGB 10/30 (mid)+8A 4 -4 6 +2 0-1 55,000 5.5x
12-Jan-21 Belgium EUR 6,000 Oct-31 ms-5A -7 -2 -2 +5 3 42,000 7.0x
05-Jan-21 Ireland EUR 5,500 Oct-31 ms+1A -2 -3 2 +4 0-1 40,000 7.3x
05-Jan-21 Italy EUR 10,000 Mar-37 BTP 03/36+13A 8 -5 6 (2) 0 105,000 10.5x
Selected EUR SSA Syndications 2021YTD
Re-offer Change
Pricing Name Green Cur Amt. (mn) Maturity Initial Price Thoughts IPT to RO Now NIC* (bp) Books (mn) Subs.
(RO) vs RO
24-Jan-21 EIB EUR 3,000 Mar-36 ms-4A -6 -2 -6 Flat 2-3 21,800 7.2x
09-Feb-21 UNEDIC Social EUR 3,000 May-34 OAT (05/34)+18A 15 -3 8 (7) 1 8,000 2.7x
27-Jan-21 CADES Social EUR 4,000 May-31 OAT 05/31+18A 16 -2 11 (5) 0 10,000 2.5x
26-Jan-21 EU Social EUR 10,000 Jun-28 ms-13A -16 -3 -13 +3 1-2 83,000 8.3x
26-Jan-21 EU Social EUR 4,000 Nov-50 ms+7A 5 -2 6 +1 1-2 49,000 12.3x
11-Jan-21 EFSF EUR 3,000 Jan-31 ms-9A -11 -2 -13 (2) -1 39,000 3.0x
07-Jan-21 EIB EUR 5,000 Jan-31 ms-9A -11 -2 -14 (3) 1 48,800 9.8x
05-Jan-21 KfW EUR 5,000 Jan-31 ms-7A -9 -2 -14 (5) 2 19,500 3.9x
*New Issue Concession (NIC) is the difference between Re-offer and Fair value spotted by the lead managers at Initial Price Thoughts stage
Source: Citi and IFR
6 For institutional use onlyAppendix 1b: Secondary Performance
EUR SSA vs Swaps French Agencies vs OATs
-8 17
-9
16
-10
-11 15
-12
14
-13
13
-14
-15 12
-16
11
-17
-18 10
-19
9
-20
04-Jan 12-Jan 21-Jan 30-Jan 07-Feb 16-Feb 25-Feb 8
04-Jan 12-Jan 21-Jan 30-Jan 07-Feb 16-Feb 25-Feb
EU-0.000-06/02/28 KFW-0.000-01/10/31
EIB-0.000-01/14/31 EFSF-0.000-01/20/31 CADES-0.000-05/25/31 UNEDIC-0.100-05/25/34
Source: Citi
7 For institutional use onlyAppendix 2: Deficit and Debt as % of GDP
Deficit/GDP forecasts (%) Debt/GDP forecasts (%)
2019 2020 2021 2022 2023 2024 2025 2019 2020 2021 2022 2023 2024 2025
United States -5.8 -16.9 -16.5 -6.7 -5.3 -5.5 -5.5 107 126 138 140 141 141 141
Japan -3.4 -18.0 -10.0 -4.0 -3.0 -2.5 -2.0 240 270 274 274 274 274 274
United Kingdom -2.6 -19.7 -6.8 -3.6 -3.0 -2.4 -2.0 81 101 105 103 103 102 101
Euro Area -0.6 -7.7 -6.6 -4.4 -3.2 -2.6 -2.4 86 101 102 104 103 102 102
EA + est. EU -0.6 -9.1 -10.6 -8.3 -7.6 -7.0 -4.8 86 103 108 113 116 120 121
Germany 1.4 -4.8 -6.1 -3.3 -2.1 -1.9 -1.8 59 73 76 74 73 73 72
France -3.0 -9.6 -6.7 -4.3 -3.1 -2.4 -2.0 98 114 114 114 114 113 112
Italy -1.6 -10.0 -9.0 -6.3 -4.9 -3.9 -3.6 135 157 159 157 157 157 157
Spain -2.6 -10.7 -8.4 -5.4 -4.0 -3.3 -3.1 95 118 118 116 116 114 112
Greece 1.5 -8.1 -6.0 -3.7 -2.1 -0.7 0.4 177 216 220 212 209 206 203
Portugal 0.2 -7.3 -5.3 -3.5 -2.8 -2.2 -1.1 117 132 131 127 126 123 120
Netherlands 1.7 -7.1 -5.3 -3.5 -2.4 -1.7 -2.1 49 57 59 61 61 62 64
Belgium -1.9 -10.2 -7.2 -5.8 -4.0 -3.1 -3.5 99 114 116 116 116 116 116
Citi Forecast for EU Gross Issuance (EUR billions)
2019 2020 2021 2022 2023 2024 2025 2026 2027
EU 0 41 132 128 149 153 96 25 15
Source: Citi
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